Thursday, January 24, 2008

Finance Basics

Everyone can do with understanding the basics of Finance. Same is applicable for me too! :)

Sr. No.TermMeaning
1Liquidity RatioIt shows the ability of a firm to pay its short term debts as they mature
2Current RatioCurrent Assets / Current Liabilities
3Quick Ratio (Acid-test)Quick assets / Current Liabilities
where, quick assets = current assets - inventory
4Profitability RatioIt is used to measure a firm's efficiency & ability to generate profits
5Gross Profit marginGross profit / Sales
6Net Profit marginNet Profit (PAT) / Sales
7Ownership RatioThis helps to analyze the present and future investments in a firm & to compare the investments with factors such as Debt, Earnings, Dividends & Stock price
8Return on Equity or Net Worth (RONW)RONW = Net Profit / Avg. Equity
9Earnings Per Share (EPS)EPS = Net profit / No. of shares outstanding
10Price Earnings Ratio (P/E)P/E = Market price of shares / EPS
11Debt Equity RatioTotal debt / Total Equity
12Debt Service Coverage Ratio(PAT + Depreciation + Non cash expenses + interest on loans) / (interest on loans + Repayments)
13Average Net Funds Employed (ANFE)ANFE = Average Net Working Capital + Average Net Fixed Assets
14Return On Capital Employed (ROCE)ROCE = (PBIT - TAX) / ANFE
15Economic Value Added (EVA)EVA = (ROCE - WACC) x ANFE


For further reading: http://www.dsm.com/en_US/html/invest/glossary.htm

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